China shares subdued as economic news disappoints

An
investor looks at an electronic screen showing stock information
at a brokerage house in NanjingThomson Reuters

By Samuel Shen and Pete Sweeney

SHANGHAI (Reuters) - Chinese shares got off to a halting start on
Monday after an official measure of activity in the giant factory
sector fell to its lowest since mid-2012, offering no respite
from the economic drift that has dogged markets for months.

The official version of the PMI survey for manufacturing slipped
to 49.4 in January, from 49.7 the month before and short of
forecasts of 49.6.

While the miss was minor, the PMI for services also disappointed
by easing to 53.5 and challenged hopes consumption would take
over from industry as the driving force for the world's
second-largest economy.

A private survey - the Caixin/Markit China Manufacturing PMI -
underscored the trend by showing the factory sector shrank in
December for the 11th consecutive month.

The Shanghai Composite Index <.ssec> eased 0.5 percent in
early trade, while the CSI300 index <.csi300> of the
largest listed companies in Shanghai and Shenzhen fell 0.4
percent.</.csi300></.ssec>

Equity and bond markets globally had rallied on Friday after the
Bank of Japan surprised by cutting interest rates into negative
territory for the first time.

That did not stop January from being the worst month since
October 2008 for China's stock markets, with 12 trillion yuan
($1.8 trillion) sliced off the value of its benchmark indexes.

The downtrend risks becoming a vicious cycle, as those who have
used shares as collateral for loans or have bought stocks with
borrowed money are forced to meet margin calls or sell up.

The dangers are multiplied by the vast scale of the shadow
banking system.

Mid-tier Chinese banks are increasingly using complex instruments
to make new loans or restructure existing ones that are then
shown as low-risk investments on their balance sheets, masking
the scale and risks of their lending.

The size of this 'shadow loan' book rose by a third in the first
half of 2015 to an estimated $1.8 trillion, equivalent to 16.5
percent of all commercial loans, a UBS analysis shows.

HEDGE FUNDS TARGET YUAN

The People's Bank of China (PBOC) has managed to calm fears of an
imminent devaluation of its yuan by holding its midpoint , a
reference point for trading, rock steady day after day.

The Monday fix of 6.5539 per dollar was just a whisker softer
than Friday even though the dollar had climbed broadly elsewhere
in the wake of the Bank of Japan's easing.

Still, many analysts suspect the currency will be allowed to move
lower over time, and some funds are actively betting on it.

The Wall Street Journal reported some of the biggest names in the
hedge-fund industry were wagering the yuan would fall further,
setting up a showdown between Wall Street and the leaders of the
world's second-largest economy.

Chinese state run media has carried repeated warnings to offshore
speculators against trying to profit from a yuan devaluation.

Such reports will only heighten the focus on the PBoC's reserves
position, due to be reported some time this week, for details on
just how much intervention has been needed to shelter the yuan
from capital flight.